Fidelity Investments - All posts tagged Fidelity Investments

Fidelity Investments’ surprise move to convert large, retail-oriented money-market funds helps investors sidestep liquidity risks and augurs a wave of similar moves across the industry, according to Moody’s Investors Service.

Fidelity recently announced the conversion of three so-called prime funds into government funds that invest in Treasury bonds. Changes affect the $112 billion Fidelity Cash Reserves (FDRXX), the industry’s largest. Money funds are traditionally used as higher-yielding alternatives to cash.

At issue are new rules from securities regulators, slated to take effect in 2016, aimed at cutting down the potential for runs on money funds during crises. The rules will require certain money funds that cater to institutional investors to leave behind the $1 shares price for one that “floats” in value, like other mutual funds. For retail funds, the rules would allow fund boards to impose redemption fees and/or “gates” lasting as long as 10 days. Gates on money funds could leave investors unable to use their cash for days.

The Wall Street Journal’sDaisy Maxey reported that Fidelity’s “changes may result in lower yields for investors now in the prime funds, and other money managers will likely follow suit.” Maxey’s story also caught up with investors who were more concerned about getting their money in times of market stress than yield. That sentiment was echoed Monday by Moody’s Ram Sri-Saravanapavaan and team, who call Fidelity’s move a “proactive step” to help investors get their money.

“In a move that caught the money-market fund industry off-guard, this month Fidelity announced that it would convert three of its prime money market funds (MMFs), totaling $127bn in assets, into government MMFs.

Rather than let investors bear the risk of having a cash-substitute investment suddenly gated for up to 10 days, Fidelity opted to convert some of its prime funds to government funds, in which investors will not be subject to redemption restrictions.”

Sri-Saravanapavaan esimtates that more managers are likely to do the same thing, and that an additional $100 to 200 billion could be converted from prime funds to government.

October’s $24.5 billion haul was the second-biggest monthly inflow on record, he says.

Vanguard, which unseated Fidelity Investments as the biggest mutual-fund company four years ago, is benefiting from investors’ preference for indexing over active management. Equity mutual funds that track indexes attracted $85.8 billion this year through September, compared with $2.5 billion for funds that pick stocks, according to Chicago-based Morningstar Inc. Stock ETFs, which are almost exclusively passive products, received $87.2 billion in subscriptions.

Like father like daughter. It certainly seems to be the case at Fidelity Investments where Abigail Johnson has been named CEO, taking over for her father, Edward “Ned” Johnson.

The last time Barron’s wrote about the younger Johnson it was September 2012. The firm, founded by Johnson’s grandfather, had finally after years of speculation made a succession plan clear when it named her president of the mutual fund colossus, putting her next in line for the CEO’s job.

As my colleague Beverly Goodman wrote back then:

Succession planning is never easy, especially for family businesses. But when that family business is responsible for more than $3.7 trillion in assets, there’s even more at stake…Ned, now 82, hasn’t indicated that he’s preparing to retire anytime soon, but his daughter’s latest promotion signals that Abby is indeed the heir apparent — a decision that may seem obvious to some, but to others never seemed like a sure thing.

Johnson has taken a slow and steady approach to climbing the corporate ladder. She started at Fidelity more than a quarter century ago as an equity analyst and went on to manage six mutual funds before becoming president in 2001 of the firm’s investment management arm, known as Fidelity Management & Research.

Four years later, Johnson moved to the much-less-sexy side of the firm’s business, taking over the group that oversaw workplace retirement plans. And in 2010, her father split control of the firm, putting Johnson in charge of Personal, Workplace and Institutional Services, and hiring Ron O’Hanley from Bank of New York Mellon to head up FMR.

Fidelity has faced a challenging time in recent years amid pressure from rivals such as Vanguard, and shifting investor preferences.

The ETF industry’s fee wars certainly are heating up lately. But not uniformly. Here’s a prediction: Investors are less likely to see the benefits in niche funds. Not until there’s the same level of intense competition between massive fund sponsors vying for investor attention.

Big, largely commoditized emerging-markets funds and S&P 500 trackers are going to duke it out on cost. That’s great for investors. But don’t expect the same thing for, say, an auto-sector fund with no Vanguard Group clone. Nor for an equal-weighted fund giving access to a swath of smallcap stocks.

Arriving at Morningstar’s ETF Invest conference this afternoon, I sat down with First Trust ETF strategist Ryan Issakainen, who makes the distinction between (1) the big, well-known “beta” funds that are ratcheting down fee levels as we speak, and (2) ETFs like First Trust’s, which use less conventional indexing methods and often focus on specializes niches.

“There are two camps,” Issakainen says, and “the pressure is on the more similar products.”

Take the First Trust Nasdaq Technology Dividend Index Fund (TDIV), a specialized swath of dividend-paying technology stocks including International Business Machines (IBM) and Hewlett-Packard (HPQ). (Next year, the fund should be adding Apple (AAPL), whose August dividend payment barely missed an inclusion deadline.) Its expense ratio is 0.50% — well above the most heavily used plain-vanilla ETFs. And this cost isn’t being undercut by another similar fund on the market.

Indeed, how you view the cost depends on the comparison. If your benchmark is mutual funds, expect something north of 1%. That makes 0.5% look cheap. If your benchmark is ETFs, well, yes, it’s more than the PowerShares QQQ (QQQ). But you don’t get the same dividend payout in the Q’s. Moreover, the index construction is substantially different. There happens to be no other ETF that does exactly what TDIV does.

Here’s another way of putting it: ETF fees on specialized products won’t come down until competitors force them to.

So could the entry of new players change this? Sure, says Issakainen. There are no real barriers to entry, he says, except for the task of building a following among investors (an admittedly nettlesome problem for many).

Asked whether Fidelity Investments‘ plans to launch a suite of specialized, sector-specific ETFs could put on the pressure, Issakainen took the view that no ETF provider’s success is certain, including companies with huge success in other product lines. “Fidelity’s a big name, but [that] doesn’t automatically mean [they build] a following,” he said.

The effort to put interest-rate swaps and other complex derivatives on public exchanges — it’s supposed to come to fruition next year — is attracting some of the biggest fund managers around lately.

Crain’s Chicago reports that Boston asset-management giants State Street (STT) and Fidelity Investments have each taken a stake in Eris Exchange LLC, the interest-rate swap-trading venue founded in 2010. Recall that this excahnge hopes to grab trading under the new requirements of the Dodd-Frank financial overhaul, which pushes big swaths of over-the-counter trading onto public exchanges.

Neither State Street nor Fidelity’s Devonshire Investors, the firm’s private-equity wing, disclosed the size of their minority stakes to Crain’s. From Lynne Marek:

It has been challenging for the exchange to build trading volume in the past two years without the Commodity Futures Trading Commission setting deadlines to implement key provisions of Dodd-Frank that would spur the flow of new trading to Eris. In addition, low interest rates have damped volatility in the market, narrowing spreads and depressing trading volume.

But key provisions of the law finally kick in next year. The commission recently said over-the-counter trading in swaps and other derivatives, including about $465 trillion in notional worldwide interest-rate market activity, would be required to move to the public trading and clearing platforms by 2013.

“There’s been a significant acceleration in the pace of people getting ready to trade cleared swaps,” Eris CEO Neal Brady said in response to an inquiry about the new investments.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.